A warning, not an ultimatum, to Merkel

Commentary: Germany’s leader has room for maneuver

WASHINGTON (MarketWatch) — The Great Recession prompted voters in Europe to get rid of incumbents, and now the austerity “cure” is driving them away from the political center to extremes on the left and right.

The strict fiscal policies backed by German Chancellor Angela Merkel are meeting with increased opposition as voters reject the centrist parties that have supported her policies in favor of nationalist and leftist parties that oppose them.

Elections in France and Greece on Sunday provided the strongest warning yet that there would have to be some give in Germany’s rigid stance if the euro is to survive. But it was a warning, not an ultimatum, and still gives Merkel room to maneuver.

French Socialist François Hollande beat incumbent President Nicolas Sarkozy, as expected, in the runoff election there, but it was the strong showing of far-right leader Marine Le Pen and the short-lived surge of far-left leader Jean-Luc Mélenchon in the run-up to that election that drew the most attention.

Parliamentary elections in France next month could provide further evidence of how strong this support for extremist parties is in Europe’s second-largest economy, especially if Le Pen’s National Front wins some seats in the National Assembly.

Reuters

Supporters of extreme-right Golden Dawn party celebrate in Athens on Sunday. Golden Dawn is set to become the most extreme right-wing group to sit in Parliament since Greece returned to democracy after the fall of a military junta in 1974.

The big surprise in Greece’s parliamentary elections on Sunday was the emergence of the far-left coalition of anti-bailout candidate Alexis Tsipras, a charismatic 37-year-old politician, as the second-largest party, behind the conservative New Democracy but ahead of the more traditional leftist party, PASOK

The far-right party, Golden Dawn, also fared well, and between them, the two extremist groups denied the centrist parties a majority in Parliament — by two seats. New Democracy leader Antonis Samaras will try to form a coalition government, but he signaled immediately that the bailout deal he formally agreed to would have to be changed.

“We decided to take over an initiative to form a coalition government on two main pillars: the country remaining within the euro and the change of the economic policies of the bailout,” Samaras said on Greek television.

While promising to keep control of France’s debt, Hollande declared in his victory speech that Europe was watching France. “I’m sure that in many European countries there is relief and hope at the idea that austerity does not have to be our only fate,” he said.

We’ll see about that, seemed to be Merkel’s comment in a press conference on Monday. She will welcome Hollande “with open arms” when he visits Berlin next week after taking office. But she reiterated there is no question of renegotiating the new fiscal pact as Hollande pledged during his campaign.

Reuters

France's newly-elected President Francois Hollande celebrates on stage during a victory rally at Place de la Bastille in Paris.

However, a politician as creative as Merkel should find it easy to placate Hollande with a separate growth pact that keeps the terms of the fiscal agreement intact while addressing his concerns about growth.

As for Greece, Merkel noted with her usual pragmatism, the situation is “not uncomplicated” following Sunday’s vote. She said the program agreed to for the bailout must be adhered to, but who knows what kind of small concessions or temporizing Samaras would need to make even a minority government with PASOK credible, at least in the short term.

At home, Merkel saw her Christian Democratic party register its worst showing in 50 years in state elections in Schleswig-Holstein, but was heartened by the unexpectedly good showing of the Free Democrats (FDP), the junior partner in her federal coalition.

The FDP hung in there with 8% of the vote, still too little to constitute a majority with the weakened Christian Democrats but much better than expected and perhaps a turnaround in the party’s downward spiral. Recent polls for the more important state elections next week in North Rhine-Westphalia indicate the FDP has gained enough ground that it will meet the 5% hurdle to remain in Parliament.

It is a delicate dance in Europe, but Sunday’s election results are not a disaster for Merkel and her policies.

They are a signal that she needs to make some gesture of easing up on austerity. The timing for that is good, however. She can maintain her hard line for domestic constituents ahead of Sunday’s elections in North Rhine-Westphalia and start hinting at concessions when Hollande visits next week.

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